SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended September 12, 2000
Commission file number 1-7554
THE EARTHGRAINS COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 36-3201045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8400 Maryland Avenue, St. Louis, Missouri63105
(Address of Principal Executive Offices) (Zip)
314-259-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
$.01 Par Value Common Stock - 42,389,026 shares
as of October 10, 2000
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Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
Note 1 - In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary for a fair presentation of the financial
statements pursuant to the applicable SEC rules and guidelines pertaining to
interim financial information. Operating results for any quarter are not
necessarily indicative of the results for any other quarter or for the full
year. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Annual Report to Shareholders for the year ended March 28, 2000.
Note 2 - Inventories are carried at the lower of cost or market. Cost is
determined under the first-in, first-out method.
Total inventories consisted of the following:
Sept. 12, March 28,
2000 2000
--------- ---------
Raw materials $ 69.8 $ 68.3
Finished goods 27.7 23.2
------ ------
$ 97.5 $ 91.5
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Note 3 - The Company has recorded various provisions for restructuring and
consolidation in conjunction with closing domestic bakeries and restructuring
operations in Spain in order to increase efficiencies and streamline operations.
Reserves have also been established in conjunction with certain acquisitions
for restructuring related to the acquiree's operations. In accordance with
generally accepted accounting principles, the acquisition-related reserves were
recorded as an increase to goodwill and no provision was recorded. These
provisions and reserves include costs of reflecting certain fixed assets at net
realizable value less cost of disposal, employee severance benefits, and other
related closing costs that do not benefit future periods.
No such provisions or additional reserves were recorded during the current
quarter. The reserve balance at September 12, 2000 is comprised primarily of
severance yet to be paid. A reconciliation of activity with respect to the
Company's restructuring and consolidation since fiscal year 2000 is as follows:
Ending balance, March 28, 2000 $17.0
Cash payments associated with severance 2.8
-----
Ending balance, June 20, 2000 14.2
Cash payments associated with severance 1.5
-----
Ending balance, September 12, 2000 $12.7
=====
Note 4 - Effective March 18, 2000, the Company acquired the stock of Metz Baking
Company for $625 million. Metz, which operates 21 bread and specialty bakeries,
added major markets
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and brands in the upper Midwest. The acquisition was initially financed through
new and existing committed credit facilities and commercial paper.
Effective June 30, 1999, Earthgrains acquired the stock of Patrick Raulet, S.A.,
a leading producer of refrigerated dough products in Dole, France. This
acquisition complements the Company's existing European Refrigerated Dough
Products business, making it the largest refrigerated dough supplier in France.
This acquisition was funded through the cash flows of the local existing
operations.
Both acquisitions were purchased for cash and have been accounted for using the
purchase method. Accordingly, the results of operations are reflected in the
Consolidated Statement of Earnings from the date of acquisition. The purchase
price has been preliminarily allocated to the assets acquired and the
liabilities assumed based upon their estimated fair market value, and the excess
costs over net tangible assets are being amortized over 40 years. See comments
in the Management's Discussion and Analysis section of this filing regarding
impacts of these transactions during the current quarter.
Note 5 - Long-term debt is comprised of the following:
[Download Table]
Sept. 12, 2000March 28, 2000
-------------- --------------
Commercial Paper $ 295.4 $ 259.1
Notes Payable, 6.5%, due
2009 147.0 146.9
Notes Payable, 8 3/8%,
due 2003 294.9 --
Notes Payable, 8 1/2%,
due 2005 243.5 --
Revolving Credit Facility,
due 2000 -- 25.0
Revolving Credit Facility,
due 2001 -- 568.0
Other 19.1 5.4
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999.9 1,004.4
Less current portion 17.2 442.1
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$982.7 $ 562.3
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Borrowings under a $600 million revolving credit facility due 2001 established
to initially finance the acquisition of Metz Baking Company (March 2000) were
refinanced during the first quarter of fiscal 2001 through borrowings under the
Company's commercial paper programs. On July 25, 2000, Earthgrains issued $300
million in three-year, 8-3/8% fixed-rate Notes due 2003 and $250 million in
five-year, 8-1/2% fixed-rate Notes due 2005 from the $750 million shelf
registration statement filed with the Securities and Exchange Commission, which
became effective in April 2000. Proceeds from these notes, which were issued at
a discount, were used to repay a portion of the outstanding commercial paper
borrowings. In conjunction with the fixed rate debt issuance, the $600 million
credit facility was reduced to $50 million and the $400 million in forward
starting interest rate swaps, entered into in May 2000, were terminated. The
$7.8 million loss on these swap agreements will be recognized as an adjustment
to interest expense over the term of the underlying notes.
At September 12, 2000, borrowings outstanding under the commercial paper
programs are supported by $550 million in lines of credit. The commercial paper
borrowings were at weighted average interest rates of 6.9% and 6.6% during the
current quarter and for the 24-
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week period compared to weighted average short-term rates of 5.3% and 5.5%,
respectively, for fiscal 2000. Based on outstanding commercial paper and
letters of credit, approximately $220 million was available for incremental
borrowings under the existing $550 million in committed lines of credit at
September 12, 2000.
The remaining $50 million in commitments under the $600 million revolving credit
facility was terminated by the Company in October 2000.
Note 6 - Earnings per share are based on the weighted average number of shares
of Earthgrains common stock outstanding for the periods presented. The
difference in the weighted average shares outstanding used in the basic and
dilutive earnings per share calculations represents the assumed conversion of
stock options.
Note 7 - Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130) requires that noncash changes in shareholders'
equity be combined with net income and reported as "comprehensive income." The
Company has elected to report comprehensive income in its Statement of
Shareholders' Equity. Other comprehensive income for the Company relates only
to foreign currency translation adjustments. For the 12- and 24-week periods
ended September 12, 2000 and September 14, 1999, comprehensive income was $11.4
million and $9.0 million, and $16.2 million and $23.0 million, respectively.
Note 8 - On August 26, 2000, a strike was initiated by employees at the Fort
Payne, Alabama bakery. The strike spread to include 27 bakeries before ending
with ratification of a new Fort Payne contract on September 22. Significant
incremental costs for overtime, temporary labor, security, travel, distribution
and purchased goods were incurred for the Company to continue to operate
bakeries and serve customers and consumers. The labor strike had a significant
impact on the quarter's results and is expected to have an even greater impact
on third quarter earnings. See further discussion of the strike-related impacts
in the discussion of results in the Management's Discussion and Analysis of
Financial Condition section of this filing.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
INTRODUCTION
------------
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity of The Earthgrains Company
for the 12- and 24-week periods ended September 12, 2000 compared to the 12- and
24-week periods ended September 14, 1999. This discussion should be read in
conjunction with the consolidated financial statements and notes thereto for the
fiscal year ended March 28, 2000 included in the Company's Annual Report to
Shareholders.
RESULTS OF OPERATIONS
---------------------
Net sales for the 12-week period ended September 12, 2000, increased 28.5% to
$603.2 million from $469.4 million reported for the comparable prior-year
period, despite the significant impact of a strike during the quarter and an
unfavorable impact from foreign exchange rates. The strike, which began by
employees at the Fort Payne, Alabama bakery on August 26, spread to include 27
bakeries before ending with ratification of a new Fort Payne contract on
September 22. The estimated strike impact on sales during the current quarter
was between $8 million and $10 million. For the respective 24-week periods, net
sales increased to $1,202.8 million from the year-ago $919.0 million.
International sales during the current quarter were affected by a $10.0 million
unfavorable foreign exchange rate compared to the same quarter in the prior
year, and by $21.6 million year to date. Excluding the unfavorable effect of
foreign exchange rates, sales increased 30.6% for the current quarter and 33.2%
year to date. Sales growth can primarily be attributed to the contribution from
the Metz Baking acquisition.
Gross margins increased in the current period to 46.0% from 44.5% a year ago and
to 46.3% from 44.7% year to date. The margin improvements can be attributed to
benefits from acquisitions, enhanced price and mix of products, lower ingredient
costs, and the greater percentage of business in bakery operations which has a
higher gross margin than the refrigerated dough business. These improvements
were partially offset by significant incremental expenses, reduced manufacturing
efficiencies and lost revenues, all resulting from the strike. Incremental
costs for overtime, temporary labor, security, travel and purchased goods were
incurred for the Company to continue to operate bakeries in order to serve
markets and protect customer relationships. The continued impact of the strike
is expected to be even greater to third quarter profitability.
On a percentage-of-sales basis, marketing, distribution and administrative
expenses increased to 40.2% from 38.0% in the year-ago quarter and to 40.5% from
38.7% on a year-to-date comparison. The increase can primarily be attributed to
incremental strike-related distribution costs and the furthering of mix shift
between the Company's segments to a greater percentage of business in the bakery
operations, which reflects higher selling and delivery costs, coupled with
increases in fuel costs, and additional goodwill amortization relative to
acquisitions.
The increase in interest expense is directly related to the increased long-term
debt level resulting from acquisitions, generally higher interest rate levels,
and the conversion from lower cost floating rate to fixed-rate, long-term debt
during the quarter. Approximately $1.1 million during the quarter and $1.6
million year to date was due to higher interest rates.
The higher effective income tax rate in the current quarter is a direct result
of the impact of the increased nondeductible goodwill amortization, related
primarily to the Metz acquisition, on a strike-reduced earnings
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level. Nondeductible goodwill amortization increased from $2.1 million to $5.0
million in the current quarter, and from $4.2 million to $10.0 million year to
date. Due to continued significant impacts of the strike to be reflected in the
upcoming third quarter, the effective tax rate is expected to remain higher than
normal for this fiscal year, in the range of 47-48%.
Net earnings for the 12-week period were $8.9 million or $0.21 per diluted
share, compared to $15.7 million, or $0.37 per diluted share in the prior year's
comparable period. The negative impact of the strike during the current quarter
was estimated at $0.13 per diluted share. Year-to-date earnings were $19.8
million or $0.48 per diluted share compared to $28.2 million or $0.67 per
diluted share in fiscal 2000. The year-over-year comparison was affected by the
strike and, as expected, acquisition-related impacts discussed above.
Operating Segment Information
-----------------------------
The business segments of the Company are Bakery Products, which consists of the
U.S. Bakery Products division and the European Bakery Products division, and
Refrigerated Dough Products, which contains the U.S. Refrigerated Dough Products
division and the European Refrigerated Dough Products division. This discussion
reflects significant impacts in business results by operating segment, as
reported consistently with how management assesses operating segment
performance. See Note 9 for comparative presentation of business segment data.
Bakery Products
---------------
The Bakery Products segment reflected significantly higher net sales during the
current 12- and 24-week periods over the comparable year-ago periods, despite
significant unfavorable impacts of foreign exchange and the current quarter
strike. Net sales for the segment increased 32.5% to $540.9 million during the
current quarter and 34.6% to $1,082.1 million year to date. Excluding the
exchange rate impact, sales increased 34.4% in the current quarter and 36.7%
year to date. The Metz acquisition contributed approximately $140 million in
net sales during the current quarter and $276 million to date for fiscal 2001.
Continued favorable pricing and product mix shift to premium and superpremium
product lines, and core volume growth, particularly in the European Bakery
operations, also contributed to the sales increase.
Operating results improved during the quarter for the Bakery Products segment,
despite unfavorable impacts from the strike and foreign exchange rates.
Operating income increased 16.3% for the current quarter over the prior year to
$30.0 million and 30.3% to $62.8 million year to date. Excluding the foreign
exchange impact, operating income increased by 19.0% to $30.7 million for the
quarter and 32.8% to $64.0 million year to date. Increased revenues, enhanced
price and mix of products, and lower ingredient costs were primary drivers of
the improvement offsetting higher fuel costs, impacts of the strike, and higher
goodwill amortization. Integration of the Reposteria Martinez acquisition in
Spain (March 1999), which is substantially completed, continued to contribute to
very strong results for the European Bakery operations of the segment.
Refrigerated Dough
------------------
Net sales for the Refrigerated Dough segment increased slightly during the
current quarter to $62.3 million, compared to the year-ago quarter and to $120.7
million for the 24-week period. Excluding the impact of foreign exchange, net
sales increased 5.2% to $64.4 million during the quarter and 9.1% to $125.4
million year to date. Operating income for the quarter was $7.5 million
compared with $7.1 million in the prior year and $12.4 million year to date,
consistent with $12.2 million in the year-ago period. The Patrick Raulet
acquisition contributed positively to sales and operating results but was offset
by the category pricing and volume impacts domestically. A domestic price
increase initiated in August along with focus on higher
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margin products and new product introductions within that category are expected
to drive improvements in the upcoming third quarter, a higher seasonal period
for this segment.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash flow from operations continues to be a primary source of liquidity. Net
working capital, excluding cash and cash equivalents, was $116.3 million at
September 12, 2000 compared to a negative $366.6 million at March 28, 2000. The
negative working capital at fiscal year end 2000 is directly attributed to the
current maturities of the revolving credit facility used to initially finance
the Metz acquisition. During the current quarter the initial bridge financing
for the acquisition was substantially refinanced with the fixed-rate long-term
debt issuance. Additionally, the increase in working capital from fiscal year
end 2000 reflects the seasonality of the business.
$45.5 million has been invested in capital expenditures to date, with spending
for the total fiscal year planned for a level of $110-115 million.
Additionally, 101,100 shares were repurchased during the current quarter at a
cost of $2.0 million; 186,100 shares have been repurchased year to date at a
cost of $3.3 million. Approximately 1.9 million shares are authorized for
repurchase as of September 12, 2000 under the Company's repurchase program.
The Company initially financed the Metz acquisition (March 2000) with a new $600
million revolving credit facility due 2001. During the first quarter of fiscal
2001, borrowings under this revolving credit facility were refinanced through
borrowings under the Company's commercial paper programs. The commercial paper
borrowings were at a weighted average interest rate of 6.9% during the current
quarter compared to a short-term weighted average rate of 5.3% for fiscal 2000.
For the current year 24-week period, the weighted average short-term rate was
6.6% compared to 5.5% for the respective year-ago period. These commercial
paper programs are supported by the existing lines of credit.
On July 25, 2000, Earthgrains issued $300 million in three-year, 8-3/8% fixed-
rate Notes due 2003 and $250 million in five-year, 8-1/2% fixed-rate Notes due
2005 under the Company's $750 million shelf registration statement filed with
the Securities and Exchange Commission in April 2000. Proceeds from the
offering were used to refinance outstanding commercial paper borrowings. In
conjunction with the fixed-rate debt issuance, $550 million of the $1.1 billion
total committed lines of credit were terminated by the Company. The $400
million in interest rate swaps, entered into in May 2000, were also terminated.
The $7.8 million loss on these swap agreements will be recognized as an
adjustment to interest expense over the term of the underlying notes. As of
September 12, 2000, approximately $220 million was available under these lines
for future borrowings.
The remaining $50 million in commitments under the $600 million credit facility
was terminated by the Company in October 2000.
The Company's available cash will be used to fund capital expenditures, interest
payments pursuant to the outstanding debt and the initiative to begin repaying a
portion of the debt in fiscal 2001, and dividends to shareholders. Cash
provided by operations and borrowings available under the existing credit
facilities and commercial paper programs and the remaining shelf registration
should continue to provide the necessary funding for ongoing cash requirements.
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ENVIRONMENTAL MATTERS
---------------------
The Company is subject to Federal, state and local environmental protection laws
and regulations and is operating within such laws or is taking action aimed at
assuring compliance with such laws and regulations. Earthgrains has been
identified as a potentially responsible party ("PRP") at certain locations by
the EPA and may be required to share in the cost of cleanup with respect to one
material site. While it is difficult to quantify with certainty the financial
impact of actions related to environmental matters, based on the information
currently available it is management's opinion that the ultimate liability
arising from such matters, taking into consideration established reserves,
should not have a material effect on the Company's results of operations or
financial position.
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PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings. The Company has no legal proceedings which have
become a reportable event in the current period.Item 2. Changes in Securities. None.Item 3. Defaults Upon Senior Securities. None.Item 4. Submission of Matters to a Vote of Security-Holders. No matters were
submitted to a vote of security holders.Item 5. Other Information. None.Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K - None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE EARTHGRAINS COMPANY
(Registrant)
Date: October 25, 2000 By: Mark H. Krieger /S/ MARK H. KRIEGERMark H. Krieger
Vice President and Chief
Financial Officer
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